Question

It costs a company $35,000 to produce 700 graphing calculators. The company’s cost will be $35,070 if it produces an additional graphing calculator. The company is currently producing 700 graphing calculators.

(i) What is the company’s average cost?

(ii) What is the company’s marginal cost?

(iii) A customer is willing to pay $60 for the 701th calculator. Should the company produce and sell it? Explain.

Answer 1

Answer:

(i) $50 and $50.03

(ii) $70

(iii) No

Explanation:

The computations are shown below:

(i). The company average cost would be

= Total cost ÷ number of graphing calculators produced

For 700 graphing calculators

= $35,000 ÷ 700

= $50

For 701 graphing calculators

= $35,070 ÷ 701

= $50.03

(ii) The marginal cost would be

= Total cost at 701st calculator - Total cost at 700th calculator

= $35,070 - $35,000

= $70

(iii) Since we see that the company has a marginal cost of $70 and paying price or marginal revenue is $60 so it will be a loss of $10 in case of sale. So, the company should not produce it.